E-File and Digital Signatures: Where Are We Now?

While
many practitioners have moved to a
largely paperless return preparation
system and e-file almost all returns,
until recently, the IRS required
practitioners to use a paper form to
obtain an e-file authorization from
clients.

In
March the IRS updated its rules to
allow practitioners to accept Form
8879, IRS e-file Signature
Authorization, with a digital
signature.

Examples
of methods that practitioners can use
to obtain a digital signature include
a handwritten signature input on an
electronic signature pad or on a
display screen with a stylus device.
Certain typed signatures are also
acceptable.

In 2005, I started
e-filing tax returns for clients. I ­initially
offered e-file as an option but did not e-file as
a matter of routine. I quickly realized that
offering e-file while maintaining my standard
paper assembly/delivery process took more time,
cost more money, and sometimes confused
clients.

So, after two years of
offering e-file as an optional service, I
shifted to it as a standard process. All returns
were e-filed, all returns were delivered
electronically (via email or portal), and I
charged a fee if clients wanted paper copies or
PDF files on a CD. By the time I sold my
practice, I was entirely paperless. I sent
organizers and received client documents via
secure email or portal. I scanned all client
documents upon receipt, then sent them back to
the client. I delivered all returns by email or
through the portal. However, one step in the
process still had to be done on paper: The
e-file authorization form required a
pen-on-paper signature.

That is no longer the
case. On March 11, the IRS issued updated
guidance on electronic signatures. As a result,
the e-file process can now be completely digital
and paperless. Because the change was announced
during filing season, most firms likely did not
change their e-file administrative process
midstream. So, now is a good time to review the
new guidance and consider what changes to
implement, in both process and technology.

The
E-File Process

Mandatory e-filing for tax
practitioners began with the 2011 filing season
and was phased in over two years. Today, a tax
return preparer who reasonably expects to file
11 or more returns during the year is required
to transmit them electronically. Practitioners
cannot mail returns as a courtesy to clients.
Practitioners also cannot direct clients to opt
out of electronic filing as a matter of routine
or process. The IRS provides guidance for
taxpayers who want to opt out of electronic
filing, allows practitioners to apply for
hardship waivers, and provides for some
administrative exemptions. However, submitting
tax returns electronically is now routine for
most firms.

One of the biggest
challenges with e-filing has been managing the
process of obtaining the signed e-file
authorization form so that the return can be
transmitted to the IRS. E-filing shifts the
burden of submitting the tax return to the tax
practitioner, whereas it was formerly the
client's responsibility. Electronically
submitting returns to the IRS benefits both
clients and the Service because it results in
faster processing, fewer errors, and quicker
refunds. At the same time, as firms and work
flow procedures adapt to new technologies and
become increasingly paperless, the e-file
mandate has created unexpected administrative
processing burdens on tax preparers.

In the old days, a return
was considered complete when it was delivered to
the client. Practitioners provided original
returns for clients to sign and mail in
pre-addressed envelopes with clear instructions
for mailing as an added convenience, along with
a paper copy to keep for their records. As
technology improved and firms worked to
streamline their work flow and become less
paper-based, many firms scanned documents and
tax returns before returning them to clients so
that they retained no "paper file"
once the return was complete. Today, many firms
are completely paperless either because they
receive information electronically directly from
their clients or they immediately convert all
paper source documents into an electronic
format. Then, they manage the preparation,
review, and delivery of the tax return using
digital technology without printing anything on
paper.

However, because of
e-file, delivering a return to the client in any
format (paper or electronic) is not the last
step. Today, e-file has shifted the burden of
submitting the tax information to the IRS to tax
practitioners but only after the client has
signed a form acknowledging that he or she has
reviewed the return, approved it for filing, and
specifically authorized the preparer to transmit
it to the government. This final step,
regardless of how paperless the firm's return
preparation process was, included one
paper-based step. The IRS required the client to
print the form, sign it with pen on paper, and
return it to the tax preparer. While the signed
copy returned to the preparer could be in an
electronic format (e.g., fax or scan and email),
the document had to contain a "pen and ink
on paper" signature to be valid.

Where
Are We Now?

On March 11, the IRS
updated Publication 1345, Handbook
for Authorized IRS e-File Providers of
Individual Income Tax Returns (the updated publication
is available only on the IRS's website).
Additional modifications were made on March 20.
Combined, these revisions clearly authorize
taxpayers to sign, and practitioners to accept,
e-file authorization forms containing an
electronic signature.

To be clear, practitioners
must still obtain a signed e-file authorization
form before transmitting the return to the IRS.
The form must have a five-digit personal identification
number (PIN), an acceptable signature, and a
date. The new guidance clarified what
constitutes an "acceptable signature"
on Form 8879, IRS
e-file Signature Authorization. Until the IRS clarified
the guidance on March 20, it was unclear whether
a digital signature was sufficient or if
practitioners would still need to obtain a
"pen and ink on paper"
signature.

What is a digital
signature? The IRS identified several acceptable
methods:

A handwritten signature
input on an electronic signature pad;

A handwritten signature,
mark, or command input on a display screen by
means of a stylus device;

A digitized image of a
handwritten signature that is attached to an
electronic record;

A typed name (e.g.,
typed at the end of an electronic record or
typed into a signature block on a website form
by a signer);

A shared secret (e.g., a
secret code, password, or PIN) a person used
to sign the electronic record;

A digital signature;
or

A mark captured as a
scalable graphic.

Practitioners who accept
electronic signatures must take additional steps
to authenticate the taxpayer-validating the
taxpayer's name, Social Security number,
address, and date of birth by visually
inspecting a government identification. This
check must be done every year.

Digital
Signature Options

The new guidance is an
opportunity to consider ways to streamline the
final step of the tax return preparation
process—obtaining the authorization to transmit
a return to the IRS. Now that digital signatures
are allowed on Form 8879, practitioners can
consider a number of new technologies for
clients to sign and return the e-file
authorization form. Using a process that clients
are already familiar with increases the
likelihood they will easily adapt to it. Below
are some of the more common forms of digital
signatures in today's marketplace.

Electronic Signature Pad

An electronic signature
pad captures a written signature, which is then
converted to a digital image or format. These
devices, available in a variety of sizes and
formats, are ubiquitous at the mall where they
are used to sign for purchases or at the
pharmacy to sign for prescriptions. Many stores
use them routinely to process credit card
purchases. While the technology behind each
device may vary, they all perform the task of
capturing a written signature and transferring
it onto a digital document.

Handwritten Signature by a Stylus
Device

A stylus is a pen-shaped
device that is used to input information on a
computer screen, mobile device, or tablet. The
distinction between this method and an
electronic signature pad is highly technical.
The key difference is the type of device used to
capture and record the signature. With this
method, practitioners could potentially use any
electronic device with a touchscreen display
that can capture marks, input, or commands from
a stylus instead of having to buy a specially
designed signature pad. This is significant
because the technology required for this method,
in most cases, might be as easy as installing a
special app, program, or software that can run
on a tablet, touchscreen computer, or even a
smartphone.

Typed
Name

Although it is less
common, the option of providing a typed
signature is still familiar. As described in
guidance on the IRS website, this is when a name
is "typed at the end of an electronic
record or typed into a signature block on a
website form" to sign a document. While it
might seem that this could be accomplished by
creating a fill-in PDF form, that would not meet
the requirements of a "digital
signature" if the data required to be
retained are not captured and stored for each
electronic signature.

Conclusion

In addition to the types
of digital signatures described above, the IRS
permits four other options. As firms become more
paperless and consumers increasingly use
electronic signature technology or interact with
businesses online, the use of paper in the tax
return preparation process will continue to
decline. While integration of electronic
signature software with tax return preparation
software would streamline the process, it is not
required. The key is that the chosen method is
able to affix an electronic capture of a written
signature onto an electronic copy of Form 8879
and retain the following information, which must
be provided to the IRS upon request:

Digital image of the
signed form;

Date and time of the
signature;

Taxpayer's computer IP
address ­(remote transactions only);

Taxpayer's login
identification-user name (remote transactions
only);

Identity verification:
Authenticate the taxpayer's identity and, for
in-person transactions, confirm that the
government identification has been verified;
and

Method used to sign the
record (e.g., typed name) or a system log or
other audit trail that reflects the completion
of the electronic signature process by the
signer.

The initial cost to
transition to a digital e-file authorization
signature process may delay decisions to adopt
more mobile- and consumer-friendly technology.
Now is a great time to contact tax software
providers to see if they offer digital signature
options. Also, many third-party software
providers offer solutions that can be
implemented immediately without affecting
existing software or work flow procedures. By
exploring their options now, practitioners have
time to test a few methodologies over the
remainder of the filing cycle. This can put them
in a great position to have everything set up,
tested, and ready to go next busy season.

Contributor

Jina
Etienne is a director in the AICPA
Tax Section in Washington and formerly had
her own tax and accounting practice in
Maryland. For more information on this
article, contact Ms. Etienne at jetienne@aicpa.org.

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